Use tax-advantaged accounts strategically
Debates rage over which retirement account offers the most bang for a buck, but investing in different ones affords you more flexibility.
The Roth option requires that contributions go in after tax, allowing earnings to come out free of tax in retirement. Contributions to a traditional IRA may be tax deductible in the year in which they are made, but the taxman will demand his due when mandatory withdrawals begin at age 70 1/2.
With respect to traditional IRAs, "The biggest shock to people in retirement is that every dollar they take out of their IRA is going to be taxed at some level," says Elliot Herman, CFP, CPA, partner at PRW Wealth Management in Quincy, Mass. "To take out $850 net they need to sell $1,000 of their portfolio (assets). It would be prudent for individuals and families to leave tax-deferred assets alone and tap the taxable assets first so that you can manage your tax liability."
Being able to pull income from tax-free sources can be very valuable. For instance, says Herman, if "I'm going to have a big year and my income is going to put me into the 25 percent bracket, then maybe I want to take money out of the Roth."
Similarly, the tax-free income from a Roth account can help retirees control the amount of taxes they pay on Social Security benefits and minimize the amount required to be withdrawn from a traditional IRA.